How are property taxes determined?

With the passage of proposition 13 in 1978, a formula for establishing property taxes was approved to be used statewide. This formula provided that property taxes would be based upon a rate of approximately 1 percent of the market valuation of property. In addition, properties may be taxed to repay voter-approved bond indebtedness or special assessments.

What is assessed value?

Pursuant to Proposition 13, the assessed value of property is based upon its market value. Property is reassessed by the county assessors under the following circumstances:

• Up to an additional 2 percent of the assessed value is added to the property each year to keep up with inflation and population growth

• New improvements or rehabilitation of the property will cause reassessment

• The sale or transfer of title in the property will initiate reassessment

For example, if your property has an assessed valuation of $100, 000 today, the taxes paid on that property cannot exceed 1 percent ($1000 per year) plus the amount of any voter approved special taxes. Each year, the property can increase in assessed value by no more than 2 percent over the previous year. Therefore, the next year the assessed value cannot exceed $102,000 and taxes at 1 percent would not exceed $1020. Redevelopment has no effect on the assessment or tax levy process. Redevelopment agencies do not levy a property tax.

Will Redevelopment increase my taxes?

When redevelopment activities are successful, the property values within, as well as around, the redevelopment project areas will increase. The higher taxes resulting from the sale of property or new construction will reflect a rise in property values, not an increase in tax rates. The changed image of blighted areas and improved economic base will increase the marketability of property in the area. Property not readily saleable today because of the deteriorating conditions will become marketable. Redevelopment tends to increase the value of property but does not increase property tax rates.

How does the Redevelopment Agency receive tax dollars?

When the redevelopment project area is adopted, the current assessed values within the project area only are designated as the "base year." This includes the assessed value of all land and improvements within the boundaries of the project area.

After plan adoption, all the taxes paid on this "base year" assessment go, as they always have, to the city, county, school districts, and other taxing agencies. Any increase in assessed value above this base year value within a project area and the taxes resulting from this increased assessed valuation per the standard tax rate becomes the main source of revenue for the agency.

What is tax increment?

As the redevelopment plan is implemented, the improvements will result in an increase in property values within the project area. However, these increases in value will not result in increased taxes to individual property owners, unless there is a change in ownership or new construction (in other words, Proposition 13 still applies). The increases in value due to the changes in ownership and new construction will increase the tax revenues generated by the property. This increase in tax revenue is known as "tax increment." For example, if property was assessed at $100,000 this year, the taxes paid by the property owner at the standard tax rate of 1 percent would be $1000 pursuant to Proposition 13. If, as a result of new construction on the property, the property increases in assessed valuation to $500,000, the taxes paid by the property owner at the same standard tax rate would be $5000. The $4000 increase is called "tax increment" and it is these funds which can become the revenue of the agency.

How a redevelopment project is financed without a tax increase

Before a redevelopment project area is formed, all property tax revenue goes to the city, county , schools, and special districts. In a blighted area the tax revenue is usually stagnant or lags behind the increases in land values of areas without blight.

When the redevelopment project area is formed, all tax agencies continue to receive the tax revenue they received before the redevelopment agency was formed.

The redevelopment agency shares a mandatory amount of the increased tax revenues with the county, school districts, special districts, etc., using a formula in the law. This is intended to offset significant detrimental fiscal impact due to redevelopment. The redevelopment agency passes these tax revenues through to the taxing agency each year.

At the end of the redevelopment project (typically 30-45 years), after all agency debts are paid, the redevelopment project is terminated and all tax revenue from the increased assessed value created by redevelopment of the area goes to all other tax agencies in the project area in proportion to their tax rates.

As property is sold and as new construction (private and public) occurs in the redevelopment area, the assessed value of the property goes up. This causes tax revenue to increase even though the tax rate does not change. The increased tax money is known as "tax increment." It is used by the redevelopment agency to pay the expenses of improving the area and eliminating blight.

Twenty percent of the "tax increment" must be set aside into a special fund for low and moderate income housing programs administered by the redevelopment agency. 

Are there other sources of money to finance Redevelopment activities?

The flow of the Agency's share of tax increment revenues and other funds may not be sufficient to finance the full realm of redevelopment activities and projects on a pay-as-you-go basis. Therefore, the agency may issue tax allocation bonds. The bond funds will then be used to implement the redevelopment plan. In effect, the bonds are a loan of money to the agency.

In addition, the Agency can receive loans, grants, or other financial assistance from a city/county or other agencies including the various agencies of the state and federal governments or from private sources.

How are the tax allocation bonds and loans repaid?

Tax allocation bonds and loans are solely the obligation of the agency, not the city or county. The bonds or loans are repaid from the tax increment revenues which are received by the Agency each year. In other words, tax revenues generated through redevelopment activities are funneled back into the project area to stimulate additional development and to pay the costs involved.

Do taxing entities serving the project area lose tax revenue they would normally receive?

As pointed out previously, taxing entities such as the county, school districts, and special districts that serve the project area continue to receive all tax revenues they were receiving the year the redevelopment project was formed (the base year). In addition, they will receive a gradually increasing amount of the tax increment each year in accordance with a complex formula written into the law.

Does the Agency automatically receive the tax increment?

The Agency can only receive the annual tax increment if it can show that it has created a debt which is an obligation to the Agency. Debt can be created by the sale of bonds, the receipt of loans or advances of funds, the financial obligation to pay the cost of a project, or other obligations of the law. Debt which has not been paid for by the Agency is considered outstanding indebtedness and is an obligation of the Agency and not any other entity. At the conclusion of the project and after all debt has been repaid, the tax increment flow created by the redevelopment project is returned to the taxing entities.

Will Redevelopment raise tax rates?

The redevelopment agency has no power to set tax rates. Tax rates of agencies such as the county and special districts can only be raised by actions of a governing body (other than the redevelopment agency) or by a vote of the people. If this occurs, then all property within that jurisdiction's boundaries, including the project area, will face higher taxes.

How will taxing agencies benefit from a redevelopment project?

At the end of the redevelopment project life (typically 30-45v years), the taxing agencies will receive property tax revenues based on the new higher value in the redevelopment project area. The tax increment which was flowing to the Agency will then flow to all of the taxing agencies. Thus, the other taxing agencies will reap the revenue benefits of the redeveloped and revitalized project area when the project is completed.

What is the initial cost to formulate the Redevelopment Program?

The formulation a redevelopment program, including the creation of the redevelopment agency, the development of the preliminary and final redevelopment plans, the preliminary report, survey area and project area studies, and the preparation of reports, resolutions and ordinances will require professional and technical experts who have a background in planning, engineering, redevelopment, economic and financial analysis, and law. A project team consisting of the agency staff and outside consultant advisors is formed to provide this expertise. The cost of the formulation of the redevelopment program will vary considerably between projects. It will depend upon time required by the project team to complete specific tasks, the size of the project area, and the need for special studies to identify blighting deficiencies and costs to revitalize the project area. Typically, the city or county advances a loan to cover the operating costs during the first few years.

Doesn't the law require the Redevelopment Agency to undertake housing projects?

Affordable housing is increasingly important to community redevelopment. There are many outstanding examples of redevelopment through new housing construction and rehabilitation of older units. The redevelopment law requires that 20 percent of the tax increment be spent to improve the quality and/or quantity of housing for very low, low, and moderate-income families or persons.

 Does the law require limitations on the Redevelopment Program?

In formulating the redevelopment plan, limitations are established for various aspects of the redevelopment program. These include: (1) the length of time the redevelopment project area and plan will be in existence; (2) the time in which eminent domain may occur; (3) a time limit on the establishment of loans; (4) a limitation on the amount of bonded indebtedness to finance the project; and (5) a limitation (20 percent) on the amount of vacant land that can be included within a project area.  

Do politics of the community play an important role in the decision to use Redevelopment?

Redevelopment has gone through many major changes due to its increased use by communities in differing political climates. When understood, redevelopment is seen as a positive and constructive tool for the community to use. If misunderstood or misrepresented, it can become a controversial issue where timing and politics in the community become a significant element of the entire process. However, in recent years elected officials and citizens have become knowledgeable regarding the redevelopment process and citizen input is generally thoughtful and constructive.